Will I Get Audited? Do These 5 Things and It's a Sure Thing!

By Barbara Weltman, Esq.

An IRS audit -- it's what taxpayers most dread as they prepare their returns and what 1.3 million of them faced last year -- up 5% from the year before.

As the White House and Congress look for more ways to shrink the federal budget deficit, your chances of being audited are likely to grow, especially if your income tops $100,000.

Although there are no foolproof methods to avoid an audit -- and many returns are chosen randomly -- there are certain red flags that draw the attention of IRS computers and auditors.

Here are mistakes that could cause your return to stand out and suggestions on how to avoid an audit...

Omitting or underreporting income. Employers and financial institutions sometimes report income incorrectly to taxpayers and the IRS on W-2 forms (for employees) and 1099 forms (for independent contractors).

Safest: If you receive an incorrect W-2 or 1099, don't just substitute a different figure on your tax return. Get the mistake corrected by the source, and ask for a new W-2 or 1099.

Failing to fill out an Alternative Minimum Tax (AMT) schedule. This year, more than 3.5 million individuals are expected to owe this tricky tax, which kicks in when deductions push the regular tax below a certain minimum amount. Taxpayers who live in "high tax" states, such as New York and New Jersey, are particularly vulnerable, because state and local income tax and sales tax are not deductible for AMT purposes

Safest: Use the IRS 2006 AMT assistant, an online calculator at www.irs.gov (put "AMT Assistant" in the search window), to determine whether the AMT applies to you.

Messing up the math or leaving blanks. IRS computers easily detect math errors and omissions.

Safest: Print out your calculations so that you can double-check them. Review all lines, as well as blanks, to make sure that you didn't leave out required information or put it in the wrong place. That includes the signature lines -- remember that both spouses must sign a joint return.

Better yet: File electronically. It cuts down on math errors -- E-filed returns have an accuracy rate of more than 99%, compared with 80% for paper returns, because the program checks the math.

Claiming too many deductions and/or credits. The IRS is on the lookout for excessive deductions and credits.

Example: In January, the IRS said that some taxpayers are asking for too much in refunds for certain taxes they paid in the past on long-distance phone bills. Those taxes have been ruled illegal, and the government is offering to refund to each taxpayer a "standard" phone tax amount of $30 to $60, depending on the number of exemptions claimed on the tax return, without requiring any proof. For higher amounts, proof of what was paid in phone taxes is required. IRS commissioner Mark W. Everson said that "people requesting an inflated amount will likely see their refund frozen, may have their entire tax return audited and even face criminal prosecution where warranted."

If you request more than the standard phone tax refund, be sure to have on hand the phone bills that prove what you claim.

Safest: In general, don't claim deductions that far exceed what tax preparers say is reasonable for your income bracket, or if you do, attach an explanation. Attach copies of bills for unusually high medical expenses. Have proper documentation for donations to charity. For used clothing and household items, take pictures of the items to show that they were in good used condition or better.

Guidelines: There are no "standard" deduction amounts. Based on IRS statistics for 2004, taxpayers with adjusted gross incomes (AGIs) of $50,000 to $100,000 itemized an average of $2,663 in charitable contributions and $6,125 in medical costs. Those with AGIs of $100,000 to $200,000 itemized an average of $4,130 for charity and $9,811 for medical costs.

Claiming losses on hobbies. Deductions for a fun activity, such as coin collecting, may be rejected if the activity results in losses that don't make commercial sense year after year.

Safest: Don't claim deductions for hobby expenses unless you are prepared to show that you are engaged in the activity for profit.

B

Bottom Line/Personal interviewed Barbara Weltman, Esq., an attorney in Millwood, New York, author of J.K. Lasser's 1001 Deductions and Tax Breaks 2009 (Wiley). She is publisher of the free monthly online newsletter Big Ideas for Small Business. www.barbaraweltman.com.

Tax-Related Humor

Understanding The IRS Office Audit

Where would you guess an IRS office audit is conducted? That’s right! An IRS office audit takes place in an IRS office. Less experienced IRS employees (typically an IRS tax auditor) usually carry out this type of audit. Office audits are mostly concerned with simple tax matters and can be limited to a few simple items on your tax return.

Now do not be fooled. IRS office audits are more complex than IRS correspondence audits, but are not complex enough to require a Field IRS Audit. Most IRS office audits concern common items found on tax returns, such as exemptions, travel and entertainment expenses and casualty losses.

If you find yourself the subject of an IRS office audit, you will receive a letter (sometimes referred to as an “appointment letter”) requesting you to bring in documentation supporting the tax items on your tax returns that are in question. Depending on just how much documentation the IRS is requesting, you might be able to send necessary documents through the mail. Obviously if you can handle the matter this way, I would. If this option is not afforded to you, suck it up and bring to the appointment all tax documents that the IRS tax auditor requested. If the items on your tax return are legit and you can back that information up, you obviously have nothing to worry about. Now if that’s not the case…be ready to pay up.

Cheers!
-Taxus

For information on:
Correspondence Audit—see this past article.

Understanding The IRS Correspondence Audit

As stated in a previous post, the correspondence audit is the simplest type of IRS audit. During this audit, the IRS sends the taxpayer (via mail) a request for proof of a particular deduction or exemption taken by either completing a special form or sending photocopies of relevant financial records. On a positive note, the taxpayer has the greatest chance of coming out on top during a correspondence audit.

If you find yourself in the middle of a correspondence audit, please don’t panic. You should know that the IRS conducts hundreds of thousands of correspondence audits every year. This type of audit is the least threatening IRS tax audit for the taxpayer….something you should keep in mind before you have a panic attack when you receive that letter in the mail.

This Correspondence audit process generally begins when a taxpayer receives a notice from the IRS that the taxpayer’s tax return has been changed. Most correspondence audits are going to be conducted through the IRS service center where the tax return was filed.

When you receive this letter in the mail, do not immediately send a check to the IRS and do not simply ignore the correspondence audit letter as if you never received it. I mention this because these are two mistakes often made during a correspondence audit. Just because the letter comes from the IRS does not necessarily mean that they are correct in their findings. Everyone can make mistakes, even the IRS. Only after you have conducted a thorough review, comparing a copy of your tax return with the IRS notice, can you be certain that the IRS is either correct or incorrect.

As far as ignoring the correspondence audit….yeah, bad idea. Ignoring an IRS notice will not make the problem go away. If you do not respond to the IRS notice or IRS correspondence audit letter, the IRS treats the lack of response as an agreement with its computations and you will be assessed the additional taxes owed. Failure to pay the additional taxes will result in penalties and interest against you.

If you do happen to disagree with the IRS correspondence audit notice, you have the option to appeal it. This procedure is explained in the notice you receive from the IRS. In most circumstances, your written explanation must be sent to the IRS within thirty days of the date of the IRS notice. Your response should include copies of any tax documents that will support your appeal.

All in all, a correspondence audit is not a big deal. If you receive that notice in the mail, take a deep breath and calmly address the situation. As mentioned before, you might end up owing a little more on your end or you might find that the IRS has made a mistake and you own nothing. Trust me, things could be worse.

Cheers!
-Taxus

What Can I Get You?

If the IRS was a local pub, they would have several different audits on tap. How about a nice smooth Coorespondence Audit? ...Or better yet, how about a pint of something more stout...say a Field Audit? Whatever you fancy, I am sure the IRS will serve it up nicely.


You see there are many types of IRS audits. Some types of IRS audits are less aggressive than others. As no surprise, most types of audits are designed to increase the tax bills for the tax payer and increase income for the IRS.


Four common types of audits include:


Correspondence Audit: The correspondence audit is the simplest type of IRS audit. During this audit, the IRS sends the taxpayer (via mail) a request for proof of a particular deduction or exemption taken by either completing a special form or sending photocopies of relevant financial records. On a positive note, the tax payer has the greatest chance of winning a correspondence audit.

IRS Office Audit: An IRS office audit is done in an IRS office and is mostly about simple tax matters.

Field Audit: Field audits are usually the most complete IRS audits and are performed by experienced IRS officers. I am afraid to say that a field audit usually results in additional tax bills for the tax payer.

IRS Repetitive Audit: An IRS repetitive audit is an IRS audit conducted on the same tax payer over and over. If no additional tax bills results from an audit and the IRS wants to audit the same tax payer again, the tax payer can ask the IRS to discontinue the IRS audit on the ground of IRS repetitive audit.

This week I will be discussing these four types of audits in further detail. Stay tuned.


Cheers!
-Taxus